INSIGHT: Olefins makers face a tough 2010

LONDON (ICIS news)--The global olefins business has been set for change for years, but now that change is becoming a reality.

Available capacity is expected to increase markedly in 2010, with capacity in the ?xml:namespace>Middle East to rise particularly steeply.

ICIS data suggest that over the course of next year, ethylene output from crackers in the Middle East and Africa could increase by more than 580,000 tonnes per month.

The chart below illustrates the growing influence of Middle East capacity and the potentially declining importance of cracker complexes in Europe. Much the same can be said about facilities in parts of northeast Asia and, indeed, in North America, although a great deal of North American ethylene capacity is gas-based.

When including capacity additions in Asia, the forecast is for an 8% increase in global ethylene capacity in 2010, or an additional 10.3m tonnes, analysts at Citibank noted late this month. The Middle East's share of the total is 36%, or 3.7m tonnes.

Not surprisingly, the impact on high-cost producers – principally in Europe, Japan and South Korea – is expected to be negative, but the worst could still be delayed. This month, Thailand’s Supreme Administrative Court brought a halt to the construction of new capacities at Mab Ta Phut.

Citibank’s Asia-Pacific chemicals analyst estimates that the Thai court's decision takes out 14% of the expected global ethylene capacity increase, 14% of the previously expected increase for polyethylene (PE) and 7% of new capacity additions for polypropylene (PP).

But companies cannot produce robust plans on the likelihood of yet more delays. They have to take a balanced view.

Olefins makers have seen some improvement from the extremely difficult start to 2009, when demand downstream from the cracker was poor enough to force temporary shutdowns. Demand has improved, but polyethylene (PE) remains weak in North America and Europe.

The business for producers in these regions has been buoyed particularly by demand from Asia. The steep rise in China’s imports of virgin resin has been the important feature for the business over the course of the year.

In its latest report, Citibank reckons that PE demand in North America has remained steady at best because consumer spending has not increased due to concerns over rising levels of unemployment. “The weakening of the PE market is worrying as reports of improving economic activity seem to be bypassing the polymer market,” the report states, referring to western Europe.

“There have been some production issues, although these have little impact on the market as there is more than sufficient capacity to satisfy demand,” the report states.

On both sides of the Atlantic, producers are banking on strong export markets to keep them out of trouble. Export opportunities can help underpin the business against the backdrop of improving, but still weak, domestic demand. Demand from China is also key to determining just how much material from the Middle East might be found in the European market, especially in 2010.

The Chinese government’s massive stimulus package has had a great impact on polymer markets this year, but players are worried about the impact of new domestic capacities on supply/demand balances in 2010.

Some believe that 2010 will be a year of two halves, with the first six months easier than later in the year as new capacities are ramped up.

Major producers have already indicated that they have planned for 2010 to be worse than 2009, given the potential supply overhang. US producers are helped greatly by favourable gas-feedstock costs in relation to oil-based naphtha, and have taken a lot of the pain already with plant closures.

There can be little doubt, however, that higher costs or poorly located production assets will come under increasing pressure in a well-supplied and relatively weak global demand environment.